Development is an integral part of the OECD’s overall mission to build a stronger, cleaner and fairer world economy. The OECD has a rich policy experience to share and has established mechanisms that help countries learn from each other, on the one hand, and enhance development co-operation, on the other.

The OECD Development Centre plays an important role in this mission, and has a long tradition of advancing the frontiers of knowledge on the forces that drive development and social progress in developing countries. Today’s launch of Perspectives on Global Development is a good example of this pioneering work.

The first edition - Shifting Wealth- looks at how the global economy has changed during the last two decades. Specifically, it assesses the challenges and opportunities that the rise of the emerging economic powerhouses, such as Brazil, China and India bring to other developing countries. And it provides guidance on how developing countries can take advantage of the new economic landscape to further their own economic progress.

Tribute to Professor Angus Maddison

The inspiration and much of the intellectual underpinning of this report lies in the foresight of the late Professor Angus Maddison, an outstanding economist and OECD legend who sadly, recently passed away. Twelve years ago, the OECD Development Centre published his prescient work, “Chinese Economic Performance in the Long Run”. Professor Maddison concluded that China was retrieving its “historical position” as the world’s largest economy, generating much controversy in the West and some satisfaction in China.

The report we are launching here today takes Maddison’s work as its point of departure.

Two decades of Shifting Wealth

Shifting wealth documents the substantial improvements in growth, poverty reduction and inequality in the developing world. The pace of change has been so rapid, that the world economy today is barely recognisable from that of twenty years ago. The centre of economic gravity is moving from West to East, from the industrialised economies to the large developing economies, particularly China and India. This is what we call ‘Shifting Wealth’. And this trend is set to continue. Our forecasts, based on Maddison’s work, anticipate that emerging and developing economies will account for nearly 60% of world GDP by 2030.

Policy making and the global governance architecture needs to recognise and take into consideration these changes. This is beginning to happen. Next week, for example, the leaders of the world’s premier economic forum since last year, the G20, will meet in Toronto. The fact that this has been called the “Prime Forum for Economic Cooperation” is proof that to address global issues, major developing and developed countries should work together. At the G20 table will be the leaders of the countries at the heart of this Shifting Wealth story: Brazil, China, India, Indonesia, and South Africa.

This would have been almost unimaginable twenty years ago. But it is vital. As a result of their sheer size as well as their growth performance, China and other large emerging-market economies matter. They matter because they increasingly shape the global macroeconomic situation and prospects. They matter because of the impact on competitiveness and influence on global income, employment and commodity price developments. In short, they matter, because they affect development prospects in the rest of the world.

Developing countries will need to adapt to this new economic geography. We used to think that countries progressed by building up their technological capacity in the manufacture of relatively simple commodities (toys, textiles, etc), and slowly upgrading towards more sophisticated goods. Today, we know that different development paths are possible. Some countries have already been positioning themselves very successfully and harnessed the shift. Vietnam, for example, has integrated itself into global production chains, and has impressive growth rates, while at the same time sustaining a strong record in terms of poverty reduction. However, for other developing countries, like Mexico, there are new competitive pressures stemming from the rise of the emerging countries, and successful positioning may mean finding new niches in the global market.

China: the poverty reduction “machine”

One of the positive consequences of rapid growth in China, India and elsewhere is poverty reduction. Since 1990, the number of people in the world living in extreme poverty on less than a dollar-a-day has fallen by more than a quarter – approximately half a billion. About 90% of these people were in China. The record of poverty reduction in the rest of the developing world is more mixed, and the Millennium Development Goal of halving poverty by 2015 is still some way off.

Moreover, inequality is increasing in many of the high-growth developing economies. Growth alone is clearly not enough. For emerging economies, the good news is that thanks to their new-found wealth and prosperity, governments can afford to boost public spending on social protection, including welfare assistance, to reduce inequality. As this report emphasises, some developing countries are setting important examples. For instance, Brazil’s cash transfer programmes now cover 18 million households (74 million people, or 39% of the population).

The untapped potential in South-South links

The Shifting Wealth report looks at another new feature of the global economy and that is ‘South-South’ links. The number and intensity of economic ties between developing countries are increasing. The facts speak for themselves:

In 2009 China became the leading trade partner of Brazil, India and South Africa.

The Indian multinational Tata is now the second most active investor in sub-Saharan Africa.

Emerging economies now give over 100 times more aid to developing countries than they did in 1990, to reach about 15 percent of the flows of OECD DAC donors.

There is enormous untapped potential in these South-South flows of trade, aid and investment, which countries can use for development.

Take trade, for instance. Developing country trade has expanded very rapidly, and now accounts for 37% of global trade. Approximately half of that total is South-South trade, i.e. between two developing countries. There is still much scope for future growth. Our analysis in this report shows that lowering tariffs between developing nations to the levels that prevail between advanced economies would give a welfare gain of nearly 60 billion dollars. This is almost double the gains that would be achieved by a similar reduction in tariffs between advanced and developing countries. Liberalisation in the trade of manufactured goods is where most of the gains – 53 billion dollars - could be made. And these are just the static gains from trade liberalisation. The dynamic gains, in terms of competitive effects and technological spillovers, could be much larger.

Foreign direct investment is another South-South flow that has the potential to benefit poorer developing countries through job creation and the transfer of technological know-how. But a conducive investment climate is needed to attract investment and to ensure that their full benefits are reaped. This involves, inter alia, an innovation framework that promotes linkages between domestic and foreign investing enterprises, thereby facilitating the transfer of state-of-the-art technology and management know-how.

And in aid, the ever-increasing number of donors is a welcome source of finance for development. One challenge is to avoid the loss in aid effectiveness which can happen when aid is delivered from too many sources – what we call ‘aid fragmentation’. Donors old and new must work together to ensure that their efforts are complementary, and that development co-operation is transparent.

Shifting wealth: a threat or an opportunity?

To conclude I would like to dispel the trepidation that some commentators hold of the large scale shifts in economic geography that we are discussing today. This report shows that the ‘rise of the rest’ is not a ‘threat to the west’. Overall, it is good news for development and good news for the global economy.

Increased prosperity in the developing world is leading to improvements in the range and quality of exports, greater technological dynamism, better prospects for doing business, and a larger consumption base. Innovation in these countries - be it in the case of renewable energy, or on medical research - are also benefiting people all over the world. These are all powerful elements which drive economic development.

But we have to make sure that these gains are realised. The report stresses the importance of cooperation in areas such as technology transfer, FDI and trade. Another element is through peer-learning. If there is one thing that we have learned from the OECD experience, it is in the power of peer-learning. As the world struggles to consolidate the economic recovery and move to a stronger, cleaner and fairer world, collaborative efforts are needed more than ever before.

Imagine the consequences if the Asian Giants had followed the industrialised countries into recession? These large emerging market economies have helped soften the impact of the most serious global recession since the 1930s. Through their trade and investment links they have also mitigated the impact of the crisis on the rest of the developing world. And now in the recovery phase they are a major source of growth.

Ladies and gentlemen, the increased wealth and prosperity of the emerging giants is welcome news the world over. And the shift we have seen in the past few years is just the beginning. There is still some way to go before these countries achieve their full potential.

In other words, Angus Maddison was right! Many of his predictions have come true and others are set to do so. And as this reports shows: the world will be a better place for it.